The Department of Labor's (DOL's)
new overtime rule, projected to make roughly 4.2 million currently exempt employees eligible for overtime pay, faces an uncertain future. A federal court stayed the rule less than two weeks before its Dec. 1 implementation date, leaving businesses that had been readying to comply with the higher exempt salary threshold in a holding pattern. Meanwhile, the Obama administration has filed an appeal, but legal experts are expressing doubt about its likelihood of success.

So, what is an employer to do? Jeff Ruzal, an attorney with Epstein Becker Green in New York City, counsels clients to prepare so that they are "well-positioned to make any changes that may be necessary if and when the new rule is implemented." He suggests conducting a self-audit to understand all the requirements of the DOL's white-collar exemption, which exempts executive, administrative and professional (EAP) employees from the Fair Labor Standards Act's (FLSA's) minimum wage and overtime pay requirements, and to ensure full compliance with them.

FLSA Overtime Rule Compliance

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That includes making sure your organization is in compliance with the existing overtime rule. In particular, he urges employers to be certain that the duties requirements for exempt employees are satisfied. "Don't just rely on what a job description says; talk to the managers about actual job duties."

Robin Samuel, an attorney with Hogan Lovells in Los Angeles, takes a similar view. "Most employers want to do the right thing. The rule and injunction give employers the opportunity to re-evaluate jobs and decide whether reclassification is appropriate."

Keeping track of who is and isn't exempt under the white-collar exemption is difficult even when the law is settled. A review of the baseline white-collar exemption requirements may help clarify an employer's obligations.

Basics of FLSA White-Collar Exemptions

A job description must meet three criteria to qualify as a white-collar position exempt from FLSA overtime pay requirements:

A salary-level test requiring that an employee be paid a minimum specified amount –$455 a week or $23,660 a year under the old rule, which was to be increased by the new rule to $913 a week or $47,476 a year.

A standard duties test requiring that the job primarily involves duties described under the executive, administrative or professional exemptions.

A salary-basis test requiring that an employee be paid a predetermined, fixed salary of at least the required minimum regardless of the quality or quantity of work performed.

Salary-Level Test

If implemented, the new salary level means that most workers with a salary of less than $913 per week will have to be paid time and one-half times their regular hourly rate for each hour worked over 40 in a week unless they meet the duties test to qualify as an executive, administrator or professional. If not implemented, workers with a salary of less than $455 a week will be eligible for overtime. The salary level is not a minimum-wage requirement, and no employer is required to pay an employee the salary specified in the regulations unless the employer is claiming an EAP exemption.

Administrative and professional employees (but not executive employees) may also be paid on a "fee basis." If the employee is paid an agreed-upon sum for a single job, regardless of the time required for its completion, the employee will be considered to be paid on a fee basis. A fee payment is generally paid for a unique job, rather than for a series of jobs repeated a number of times and for which identical payments repeatedly are made. To determine whether the fee payment meets the minimum salary-level requirement, consider the time worked and determine whether the payment is at a rate that would amount to at least the salary-level threshold per week if the employee worked 40 hours.

Some employees are exempt from the salary-level test, including outside sales employees; certain hourly computer workers who are paid at least $27.63 per hour; certain employees of the video and filmmaking industry; and professionals including teachers, doctors and lawyers. All of these workers are exempt, regardless of their salary.

Standard Duties Test

The standard duties tests remain unchanged under the new rule:

The executive exemption requires that an employee have the primary duty of managing the enterprise or a recognized department; customarily and regularly direct the work of two or more employees; and have the authority to hire or fire employees or to make recommendations regarding hiring, firing or promotion.

The administrative exemption requires that an employee have the primary duty of performing office or nonmanual work directly related to management or general business operations of the employer or its customers; the employee must also exercise discretion and independent judgment with respect to matters of significance.

The professional exemption requires that an employee have the primary duty of performing work requiring knowledge of an advanced type—work that is predominantly intellectual and requires the consistent exercise of discretion and judgment—in a field of science or learning customarily acquired through a prolonged course of specialized intellectual instruction; or have the primary duty of performing work requiring invention, imagination, originality or talent in a recognized field of artistic or creative endeavor.

Salary-Basis Test

Traditionally, the salary-basis test is the EAP exemption criterion that employers find most problematic. The only change introduced by the final rule that affects the salary-basis test is amending it to allow employers to use nondiscretionary bonuses and incentive payments, including commissions, to satisfy up to 10 percent of the new standard salary level.

Employees are considered to be paid on a "salary basis" if they are paid a predetermined amount—not less than $455 per week under the existing rule, or $913 under the new rule—that is "not subject to reduction because of variations in the quality or the quantity of the work performed."

In other words, an exempt employee must receive his or her full salary for any week in which the employee performs any work, regardless of the number of days or hours worked (subject to a few exceptions discussed below). For example, if an employer's workweek runs from Sunday to Saturday, and an exempt employee is present to work six hours on Monday and three hours on Tuesday and no further hours during that workweek, the employee must be paid his or her full week's salary, unless the absence is covered by an exception.

The minimum-threshold salary earned must be exclusive of the value of room and board or any other noncash items.

If an exempt employee is ready, willing and able to work, deductions may not be made for time when work is not available. If the employer makes deductions from an employee's predetermined salary for absences caused by the employer or due to the operating requirements of the business, that employee is not paid on a "salary basis." It is important to note, though, that exempt employees are not required to be paid for any workweek in which they perform no work.

Permitted Deductions

Deductions from an exempt employee's pay are permissible:

When the employee is absent from work for one or more full days for personal reasons other than sickness or disability.

For absences of one or more full days due to sickness or disability if the deduction is made in accordance with a bona fide plan, policy or practice of providing compensation for salary lost due to illness (note that employers may also deduct for a full-day sick- or disability-related absence if an employee is not yet eligible for the salary replacement plan or has exhausted available leave).

To offset amounts the employee receives as jury or witness fees, or for military pay (note this is an offset against salary, not an actual pay deduction).

For penalties imposed in good faith for infractions of safety rules of major significance.

For unpaid disciplinary suspensions of one or more full days imposed in good faith for workplace conduct rule infractions, such as sexual harassment, violence, drug or alcohol violations, or violations of state or federal laws.

Further, an employer is not required to pay the full salary to exempt employees who work less than a full week during their initial or terminal week of employment, but may pay an hourly or daily equivalent of the full salary for time actually worked during that period. An employer may not recoup any negative leave balances from an employee's final paycheck.

Similarly, an employer is not required to pay the full salary for weeks in which an exempt employee takes unpaid leave under the Family and Medical Leave Act (FMLA), but may pay a proportionate amount of the full salary for the time actually worked. Partial-day deductions from pay are allowed. For example, if an exempt employee who normally works 40 hours per week uses four hours of unpaid leave under the FMLA, the employer may deduct 10 percent of the exempt employee's normal salary for that week.

However, if an employer offers unpaid leave beyond that required under the FMLA, the employer may deduct proportionately from the employee's salary but only in full-day increments. Deductions for less than full-day amounts are permissible only for partial-day absences specifically mandated under the FMLA.

Deductions from Leave Accounts

The preamble to the existing DOL rule states: "Employers, without affecting their employees' exempt status, may take deductions from accrued leave accounts." Although some courts have ruled that deductions from accrued leave accounts are inconsistent with payment on a salary basis, several DOL opinion letters have taken the position that a deduction from accrued paid leave does not amount to a deduction from salary. The DOL is unlikely to find a violation where, for example, an employer makes deductions from an exempt employee's sick leave account equal to partial-day deductions, but to be safe, employers should consider following court decisions in their jurisdictions.

Effect of Improper Deductions from Salary

Isolated or inadvertent improper deductions will not result in loss of the employee's exemption if the employer reimburses the employee for the improper deductions. However, when an employer has an "actual practice" of making improper deductions from salary, the exemption will be lost.

Factors the DOL will consider in determining whether an employer has an actual practice of making improper deductions include:

The number of improper deductions compared to the number of employee infractions warranting deductions.

The period during which the employer made improper deductions.

The number and location of the employees affected and the managers responsible.

Whether the employer has a clearly communicated policy permitting or prohibiting improper deductions.

If an actual practice is found, the exemption will be lost for the period during which the deductions were made, not only for the employees directly affected by the improper deductions but for all employees in the same job classification working for the same managers responsible for the improper deductions. Thus, if it is found that two managers engaged in an actual practice of making improper deductions from the pay of six out of 40 exempt employees under their supervision for two years, all 40 employees would lose the exemption for that two-year period.

However, under the "safe harbor" rule, an employee may retain his or her exempt, salaried status if the employer made a good-faith effort to comply with the FLSA by:

Having a clearly communicated policy that prohibits improper pay deductions.

Having an employee complaint mechanism.

Reimbursing workers for improper deductions.

Making a good-faith commitment to comply in the future.

The exemption will be lost if the employer willfully continues to make improper deductions after receiving employee complaints.

Steps Employers Can Take Now

Samuel and Ruzal both agree that employers should carefully review their classification decisions and make sure they're satisfied that employees are performing the requisite duties of their jobs and being paid at the required level. If an employee isn't performing the requisite duties of an EAP position or isn't being properly paid under the existing rule, the employer should correct that situation and make sure its employees are correctly classified under the current rules.

In particular, employers should ascertain that the exemption's duties requirements are being satisfied. "The duties test has become so convoluted that even employment lawyers have difficulty figuring out who is performing exempt or nonexempt duties. The duties test is ripe for review and simplification," Samuel said, adding that employers struggle with compliance because the law is not clear.

Ruzal noted that the overtime rule's focus on the salary test, to the exclusion of the duties test, was "particularly ironic" in light of the district court's finding that the DOL's doubling of the salary-level test had modified the underlying EAP criteria and undercut the duties test. "By focusing only on salary and not on duties, the court found the essence of the EAP test was being unjustly altered."

Jesse Panuccio, an attorney with Foley Lardner in Miami, also criticized the DOL for focusing exclusively on the salary-level test "and not doing anything to address the changing nature of the workplace." When the FLSA was first introduced in the 1930s, "there was a sharp distinction between blue-collar and white-collar workers, but those lines have blurred now, and the new reality should have been taken into account by DOL."

Employers must also be careful to meet any state-specific salary-level requirements in addition to the federal salary-level test. "For example, California and New York already have higher salary thresholds than the existing federal rule, so employers need to be sure their employees are properly classified under state as well as federal law," Samuel said.

If the decision is made to reclassify some employees, whether as exempt or nonexempt, "an employer needs to clearly communicate what that really means to the affected workers, in terms of clocking in and out or taking a lunch break," Samuel cautioned.

"Employers have to be aware of the potential for sending employees mixed messages and causing bad feelings," Ruzal added.

Rosemarie Lally, J.D., is a freelance legal writer and editor based in Washington, D.C.

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